US Congress loves warm and fuzzy acronyms. But the fine print counts, not the name of a particular law.
Just as the Affordable Care Act (ACA) made health insurance more expensive, the SECURE Act – that is the setting of the Every Community Up for Retirement Enhancement Act – will make the future more uncertain for many retirees and their heirs.
Insurance companies will certainly benefit as the new law encourages employers to add annuities to their 401 (k) plans. The advantage of annuities is that they can provide guaranteed income for life, which is important as Americans live longer and many of their savings are likely to outlast.
Most financial experts consider annuities to be a bad investment, however, as the annual fees for a variable annuity range between 2.18% and 3.63%, depending on the product and features selected, according to Morningstar.
That far exceeds the fees that participants in the largest 401 (k) plans pay for investment and management services. According to BrightScope and the Investment Company Institute, fees fell from an average of 0.34% of assets in 2009 to 0.25% of assets in 2016.
As 401 (k) plans give insurance companies better access to selling annuities, attendees may face increased sales pitches for products that may not be in their best interests, Andy Panko, owner of Tenon Financial LLC, told Forbes.
Although traditional retirement plans are typically set up as annuities and offer lifelong payments, annuities are currently only available in 8% of the 401 (k) plans managed by the Vanguard Group.
Many companies have been reluctant to offer annuities as they may be held liable if the insurer they choose fails to pay claims. SECURE protects employers from being sued for following certain procedures.
“Currently,” MarketWatch said, “employers have a fiduciary responsibility to ensure that these products are suitable for employees’ portfolios, but under the new regulations, the responsibility lies with insurance companies that sell annuities to make the right investment decisions.”
Shrinking elongation IRA
SECURE has some clear advantages of what the Wall Street Journal called “the most significant changes to the nation’s pension system in more than a decade.”
But to pay the estimated $ 16 billion cost, Congress gutted the stretch IRA. If, like many Americans, you have planned to pass your savings on to your heirs through an individual retirement account (IRA), think again.
Stretch IRAs have enabled investors to pass assets on to heirs and heirs to dispose of the assets for their entire lifetime with no additional tax implications. Now heirs must close down inherited IRAs and pay all taxes due within 10 years. You don’t have to make any minimum payouts during this time, but paying out an IRA at the same time can result in a high tax burden.
The stretch IRA was ideal for medium-sized investors because it was easy to set up without a probate attorney or trusteeship. You could invest money in a Roth IRA and let it accumulate profits over the course of your life, then you could pass it on to your heirs and they could continue to allow the income to accumulate during their lifetime without paying tax on them, even if they make distributions.
Alternatively, if you’ve invested in a traditional IRA, your heirs will not have to pay taxes until they have distributed income from the IRA.
Even if you’ve already established an IRA to plan an inheritance for your children, you won’t become a grandfather.
Given that the national deficit is around $ 1 trillion this year, the revenue of $ 16 billion is practically a rounding error.
To encourage more Americans to save for retirement, Congress is penalizing those who have already saved for retirement by taking away their inheritance.
What else does SECURE include?
Loose IRA age restrictions. Since many Americans are over 65 years of age, SECURE allows them to continue saving in the IRAs for retirement as long as they have an income. In addition, people who will be 70½ years old after December 31, 2019 do not have to pay a minimum salary up to the age of 72. Previously, the law provided for minimum earnings from April 1 of the year following the age of 70.
Small Business Incentives. Around 30% of employees in the private sector currently work for employers who do not offer tax-privileged retirement provision.
SECURE makes it easy for small businesses to join forces in Multi-Employer Plans (MEPs) to offer 401 (k) plans while sharing administrative costs. MPs are attractive because they delegate some of the administrative burden and fiduciary responsibility to a plan administrator.
Previously, MPs were only allowed for companies with a common owner or other relationship. Now companies don’t even have to be in the same industry.
Brokers, money managers, 401 (k) accountants, and insurers are likely to benefit.
In addition, small employers can receive a tax credit to offset the cost of setting up a 401 (k) plan or a SIMPLE IRA plan with auto-enrollment. The new tax-free allowance is a supplement to the previous business start-up loan.
Other changes. The new law allows employers to automatically enroll workers in certain 401 (k) plans, also to automatically increase their savings rate over time to 15% of annual earnings; before SECURE the limit was 10%.
In addition, employers must allow certain part-time workers to participate in 401 (k) plans.
SECURE enables tax-free withdrawals of up to $ 10,000 from 529 education savings accounts to repay some student loans. It also allows parents to withdraw up to $ 5,000 in penalty-free distribution from a retirement account within one year of the birth or adoption of a child if the funds are used towards the cost of child birth or adoption.
The law also extends the definition of “income”, which allows more people to contribute to an IRA. Grants and other awards earned by individuals pursuing an advanced degree are now considered income to be considered when paying an IRA contribution.
SECURE’s intent is to make it easier for Americans to save for retirement, as the Employee Benefit Research Institute estimates that Americans ages 35 to 64 years old are $ 3.83 trillion below what they need to save for retirement , absence. Around 41% of households are likely to be short of cash in later life.
The new bill could include “the most significant changes to the nation’s pension system in more than a decade,” as the Wall Street Journal claims, but it is unlikely to make a major change in the way – or how many – Americans save for retirement.
Brenda P. Wenning of Newton is President of Wenning Investments LLC in Newton. She can be reached at [email protected] or 617-965-0680. For more information, please visit her blog at www.WenningAdvice.com.